An Afternoon With Pensions

Randy Barber Center for Economic Organizing 6935 Laurel Ave., #204 Silver Spring, MD 20912 randybarber@aol.com 202.531.6201

Why Were Here

RESOLUTION NO. 26 Pension Bargaining Education WHEREAS, many IBEW local unions face increasing pressure from employers during contract negotiations to eliminate traditional defined pension plans for new employees and/or freeze the defined pensions of existing employees; and WHEREAS, many employers are abandoning traditional defined pension plans and replacing them with cash balance or 401K plans; and WHEREAS, given the volatility of investment options available to the average worker; and WHEREAS, several studies predict that many workers will fall short of the required replacement income needed to produce a secure retirement; THEREFORE, BE IT RESOLVED that the IBEW International Office provide local unions with information and training regarding the various kinds of pension plans and retirement savings programs to assist in negotiations. SUBMITTED BY: Local Union 199, Fort Myers, FL Local Union 201, Beaver, PA Local Union 986, Norwalk, OH Local Union 1200, Washington, DC
Resolution adopted at 38th International IBEW Convention, September 2011 2

Outline of Todays Presentation

1. The Crisis in Retirement Income Security 2. An Overview of Basic Types of Private Sector Pension Plans 3. In-Depth Discussion of Defined Benefit and Defined Contribution Plan Issues Discussion Q&A, Specific Situations, etc.
Some Suggested Topics:
1. 2. 3. Analyzing Your Employers Plan Just Say No (if you can) If The Employer Wont Take No For An Answer

Additional Prepared Discussions:

Annex 1. Two IBEW-Sponsored Alternatives to Consider Annex 2: Annual Funding Notices and Adjusted Target Funding Attainment Issues Annex 3: A Primer on Pension Freezes
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The Future of Pensions?

Single employer Defined Benefit (DB) plans in jeopardy.
Increasingly relegated to shrinking unionized workforce.

Trend is towards Defined Contribution (DC) plans generally.

Shift costs and risks from employers to workers Smaller pension than in DB plan

DC plans alone insufficient to provide for retirement security. An IBEW-sponsored multi-employer plan may be a viable alternative.
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1. The Crisis In Retirement Security

NY Times Financial Columnist Admits Hes Been Had . . .

http://www.nytimes.com/2012/04/28/opinion/nocera-my-faith-based-retirement.html?ref=joenocera

Retirement Risk Index

Income Group 2004 2007 2009

All
Low Income Middle Income High Income

43%
53% 40% 36%

44%
57% 40% 35%

51%
60% 47% 42%

Percentage of households at risk at age 65 by income group. At risk = being unable to maintain pre-retirement standard of living in retirement. Source: Center for Retirement Research, Boston College

Historically, Industrial Countries Have Encouraged Workers to Rely On the 3 Legged Stool to Provide for Their Retirement

Source: Neil Gladstein, IAM Strategic Resources

Unfortunately, With Distressing Speed, the Pension Leg of the Three Legged Stool Is Vanishing

http://ebri.org/pdf/surveys/rcs/2012/EBRI_IB_03-2012_No369_RCS.pdf

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As Gallups Annual Survey Confirms: Employees Expect to Work Longer and Retire Later

Source: Gallups annual Economy and Personal Finance survey, conducted April 9-12. http://www.gallup.com/poll/154178/Expected-Retirement-Age.aspx

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The Employee Benefit Research Institute Has Tracked the Same Data, by Expected Retirement Age

http://ebri.org/pdf/surveys/rcs/2012/fs-02-rcs-12-fs2-expect.pdf

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And Workers Confidence In Being Able to Retire Comfortably Has Declined

http://ebri.org/pdf/surveys/rcs/2012/fs-01-rcs-12-fs1-conf.pdf

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In Every Retirement Cohort, the Percentage of those Remaining in the Workforce has Moved Up Steadily

http://economix.blogs.nytimes.com/2012/05/02/retirement-slipping-farther-and-farther-away/?hp

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http://www.pensionrights.org/publications/statistic/why-pensions-are-important

How Much is Enough?

A frequently used rule of thumb is that a Replacement Ratio of about 75% of preretirement income is the minimum required for an adequate retirement (post-retirement income/pre-retirement income = replacement ratio) Many argue that this level is inadequate, certainly for lower-wage workers (more highly compensated employees may require a lower replacement ratio)
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http://www.pensionrights.org/blog/can-we-call-it-comebackfor-db-plans

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http://www.towerswatson.com/assets/pdf/mailings/Towers-WatsonFebruary-2012-Insider.pdf

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2. Overview of Basic Types of Private Sector Pension Plans

Defined Benefit Defined Contribution So-Called Hybrid Plans

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Types of Pension Plans

Defined Benefit (DB)
Guaranteed, known monthly annuity for life (although many offer a lump sum payout option) Typically include disability, death and survivor benefits Employer bears the risk of underperformance (and the benefits of overperformance) Poor investment returns combined with frequent low contribution levels and historically low interest rates (discount rates) have resulted in many plans being seriously underfunded The pain of significantly increased required employer contributions will likely be ameliorated over time by the combination of resulting increased assets and lower stated liabilities as interest/discount rates return to normal levels Insured by the Pension Benefit Guarantee Corporation (within legislated maximums) 2006 Pension Protection Act introduced major new funding requirements and benefit restrictions under some 20 circumstances

Types of Pension Plans (continued)

Defined Contribution (DC)
Basically, tax-advantaged savings plans Individual account plans; now typically 401(k) plans, but historically included other types of plans such as supplemental savings, money purchase, profit sharing, and stock bonus plans Contributions from employer and/or employee
Some provide for employee-only contributions Some have specified automatic employer contributions (typically expressed as a percentage of payroll) Some also include an employer-match formula an employer matches employee contributions (typically 25%, 33%, 50% or 100% of employee contributions) up to a specified maximum (a 50% match of employee contributions up to 6% of pay is a common formula)

After the contributions are made, all risks are borne by the employee and the amount available for retirement is completely dependent on the account balance Expenses and fees are typically borne by the employee as well DC Plans have historically underperformed DB Plans to such an extent that DB Plans have been shown to be able to produce the same benefit for a 46% lower cost (see NIRS slides below) 21 Not guaranteed by the PBGC

Types of Pension Plans (continued)

So-Called Hybrid Plans
Increasingly, employers are proposing and/or implementing plans which combine both DB and DC features, but with typically much lower DB benefits Examples would be retaining the DB plan, but with lower future benefit accruals, and adding a 401(k) plan on top (usually with quite low employer contributions but some sort of employee contribution match) Another example would be a Cash Balance Plan (either as a replacement for the existing DB plan or in combination with either the existing DB plan or a DC plan). While complex, key elements of a Cash Balance Plan include:
They are actually DB plans, but are presented as if they were DC plans (notional employer contribution levels and account balances) While DB plan benefits are typically based on career-end salary levels, Cash Balance plans are career average plans which frequently provide much lower retirement benefits for full-career employees While required to offer a monthly life annuity as the default option, they typically feature lump sum distributions
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DB v. DC in Private Sector 2009 DC % of Plans 93% % of Active Participants 80% % of Assets 60% DB 7% 20% 40%

For Canada, 59% of plans were DB; 80% of participants were in DB; 90% of assets were in DB plans.

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Again, With Distressing Speed, the Pension Leg of the Three Legged Stool Is Vanishing

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Although the Number of Defined Benefit Pension Plan Participants Remained Stable Through 2009
(We Havent Seen 2010-on Data Yet, Though . . .)

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3. In-Depth Discussion of Defined Benefit and Defined Contribution Plan Issues

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Why Defined Benefit Pensions Are Good For Our Society

People with pensions are less likely to be at risk in retirement Features of Defined Benefit (DB) pensions enhance retirement income adequacy
DB pensions provide broad-based coverage DB pensions provide secure money for retirement DB pensions provide professional asset management DB pensions provide a lifetime income DB pensions provide special protections for spouses

Recent trends in DB pension coverage raise concern Many Americans will fall short in retirement without DB pensions
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Goldman Sachs: Funded Status Has Started to Recover

White Paper 2012, Pension Review First Take: Highlights, Challenges and Changes for 2012, Goldman Sachs Asset Management, http://www.gsam.com

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Pension Expense Growth Lags Recovery in Funded Ratios

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401k Plans Arent Getting the Job Done

What workers need

Roughly 10 times annual pay 15-18% of salary every year for 30 years

What workers actually have

Typically 2-3 times annual pay. Average deferral rate for workers who make less than $100,000 per year just over 5%.

According to the 2007 Federal Reserve Survey of Consumer Finances (the most recent full survey available)
The median 401(k)/IRA balance for participants approaching retirement was only $78,000 and this was before most of the stock market crash.
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Why Are DB Plans So Much More Efficient than DC Plans In Providing Retirement Benefits?

http://www.nirsonline.org/storage/nirs/documents/better_bang_for_the_buck_ ppt.pdf

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NIRS Methodology
NIRS modeled a population of 1,000 female teachers who work for 30 years - their final salary is $50,000 They defined a target retirement benefit about $2,200/month at age 62, replacing about 53% of final salary with the DB pension benefit (Social Security would be in addition to this) They then calculated the cost to fund this benefit through a DB plan structure, then through a DC plan structure
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Single v. Multi-Employer DBs

Multi-Employer
Collectively bargained Jointly administered by labor and management No one employer controls plan Risk is pooled Investment gains typically benefit participants Portable among participating employers

Single Employer
Sometimes collectively bargained Administered solely by Employer trustees Risk on one employer Investment gains/overfunding typically benefits employer Not portable in U.S.

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Multi-employer plan funding issues

Segal & Co. green/yellow/red zone graphic

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Cash Balance Plans

Repeating/Elaborating on points from earlier slide Cash Balance Plan -- either as a replacement for the existing DB plan or in combination with either the existing DB plan or a DC plan (earlier versions of Cash Balance Plans had major ERISA problems, mostly eliminated now and wont be described here). While complex, key elements of a Cash Balance Plan include:
They are actually DB plans, but are presented as if they were DC plans (notional employer contribution levels and account balances) Actuary determines required employer contribution based on benefit accruals, funding levels, and regulations (just like any other DB plan) PBGC coverage just like any other DB plan While DB plan benefits are typically based on career-end salary levels, Cash Balance plans are career average plans which frequently provide much lower retirement benefits for full-career employees While required to offer a monthly life annuity as the default option, they typically feature lump sum distributions

Many more details . . . Can be discussed later if desired (just ask)

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Discussion

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Resources and Acknowledgements

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Selected Resources
General information
Pension Rights Center - www.pensionrights.org National Institute on Retirement Security www.nirsonline.org Employee Benefit Research Institute www.ebri.org

Government agencies
Pension Benefit Guarantee Corporation (PBGC) www.pbgc.gov U.S. Department of Labors Employee Benefits Security Adminstration www.dol.gov/ebsa/

Tools
Form 5500s www.freerisa.com Annuity estimators www.immediateannuities.com (one of many)
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Acknowledegements
Many of the ideas and slides contained in this presentation were provided by . . .
Neil Gladstein, Director, IAM Strategic Resources Department The Pension Rights Center www.pensionrights.org The National Institute on Retirement Security www.nirsonline.org The Employee Benefit Research Institute www.ebri.org

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